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Australia’s Budget crisis is real

Yesterday, Fairfax’s Kenneth Davidson claimed that the Coalition had fabricated a Budget emergency and argued to increase public debt in order undertake worthwhile investment projects that provide a net benefit to the community:

The 2014 federal budget is built on the big lie that the Australian economy is facing a debt crisis…

The truth is, the Commonwealth doesn’t have a debt problem. Estimated net debt in 2013-14 is $197.8 billion, or 12 per cent of gross domestic product – one of the lowest of the mature industrial countries. If Australia was a corporation, the directors (cabinet ministers) would be likely to be accused of running a ‘‘lazy balance sheet’’ and booted out by shareholders (voters).

There is no reason a government shouldn’t increase its debt if it has unemployed labour resources, growing unemployment, an absence of inflation and inflationary expectations, record low interest rates and – given wise governance – opportunities for investment where the social and economic return on the investment is higher than the cost of capital.

While I agree with Davidson that increasing public debt is not necessarily “bad” if it is used to boost the productive capacity of the economy and raise living standards – making the extra debt ‘self-liquidating’ – I do feel that he has underplayed the very real medium to longer-term pressures facing the Budget as the once-in-a-century mining boom unwinds and the population ages.

While Davidson can rightly claim that there is no current emergency, the above headwinds mean that the Budget will remain permanently in structural deficit unless action is taken on both the revenue and expenditure sides. The debate, therefore, should not be about whether to have budgetary reform, but rather about ensuring that reform is undertaken in an efficient and equitable manner, for example by closing Australia’s egregious tax lurks (e.g. superannuation concessions, negative gearing and capital gains tax concessions), as well as shifting the tax base away from productive enterprise (e.g. labour) towards taxes on land, minerals and consumption.

Indeed, the Parliamentary Budget Office (PBO) has also questioned Davidson’s view that there is no Budget emergency, arguing instead that the crisis is “real” and if “left unchecked, gross debt would balloon to $667 billion”. From The AFR:

“If you just continued on the trajectory of payments and revenues prior to the budget, net debt is forecast to grow rapidly, I think, at the highest rate in the OECD,” [PBO head, Phil] Bowen said.

“I don’t think that’s a fiction at all, but neither am I saying that we have an immediate emergency”…

“Sure we’re currently at a very low level relative to the rest of the developed world, but frankly we don’t want to find ourselves where the rest of the world is,” he said.

“You’ve got to have a buffer. One of the reasons we came through the global financial crisis so well was because we started with assets.”

Davidson and other commentators also need to recognise that the credit rating agencies (CRAs) have demanded that the government provide a credible path back to surplus, or risk Australia’s AAA rating. While it would be easy to sweep aside the CRAs concerns as being irrelevant, the fact is Australia’s banking system is tied to the sovereign rating, so if Australia is downgraded, then so to are the banks. This raises a whole bunch of issues for bank funding and access to international capital markets, which are fundamental to keeping one half of Australia’s ‘houses and holes’ economy alive. Like it or not, the AAA rating is integral to Australia’s current economic structure, especially as the nation is about to go off the mining investment cliff.

Comments

“The debate, therefore, should not be about whether to have budgetary reform, but rather about ensuring that reform is undertaken in an efficient and equitable manner, for example by closing Australia’s egregious tax lurks (e.g. superannuation concessions, negative gearing and capital gains tax concessions), as well as shifting the tax base away from productive enterprise (e.g. labour) towards taxes on land, minerals and consumption.”

That too. I expect these issues to be addressed post Tax Review and taken to the next election (can’t see all those obsessing about ‘lies’ dropping point scoring for the sake of more rapid implementation of change) – can you?

“The debate, therefore, should not be about whether to have budgetary reform, but rather about ensuring that reform is undertaken in an efficient and equitable manner, for example by closing Australia’s egregious tax lurks (e.g. superannuation concessions, negative gearing and capital gains tax concessions), as well as shifting the tax base away from productive enterprise (e.g. labour) towards taxes on land, minerals and consumption.”

Good luck getting that from the left(except for our lefties here). All they want is more pink batts style waste, useless government departments, $150k jobs for arts degree holders, $200k jobs for their wharfie mates, and an NBN, which would have been good, but they were so incompetent, corrupt and tyrannically PC they destroyed themselves.

“expect these issues to be addressed post Tax Review and taken to the next election ”

Why ?? Why would anyone have any confidence at all given the entire political history available to us. I will grant you the past is not necessarily an accurate predictor of the future but surely we can see every political party that has a “review” will either cherry pick any changes because they have already decided what they want to do and the review is a waste of time and money and is just for show, or the review is rigged to produce the result they already want.
The manifest dishonesty and corruption of the entire political establishment is apparent for anyone who wants to see it.

What ever the results of the so called review the only thing you can be sure of is it will be to benefit what ever vested interest group currently holds the most influence.

Good luck getting that from the left. All they want is more pink batts style waste

You do realise the cost of original “pink batts” program was approx. $1 billion in the context of greatest financial crisis since the Great Depression. Abbott is spending $5.3 billion on his brain-dead PPL scheme, and half a billion on fucking Chaplains, all borrowed.

“……. (can’t see all those obsessing about ‘lies’ dropping point scoring for the sake of more rapid implementation of change) – can you?”

I agree – No doubt that the strategy of the opposition would be to shout about lies should the government choose to accelerate the timetable for the Tax Summit/Review and then take action on sensible recommendations immediately rather than after an election.

But if the Tax Summit is genuine and the recommendations rational, reasonable and directed to winding back unproductive investment and rent seeking and encouraging economic reform the government will be in a strong position to argue that urgent action is required and the best options are A, B, C.

They can ram those arguments and options right up the opposition and call their bluff and simply say

“We believe these are the best measures and action is needed now but we will not proceed without bi-partisan support’

What say the leader of the opposition?

Hockey and Abbott need to grow a pair and run straight through the sleepy ex-union hack forwards on the opposition benches

Interesting discussion. These fools parading as an Australian Government, who in droves claim to admire the great Thatcher, do complete injustice to her legacy and they will pay dearly for it. Any study of her government would indicate that for a lot of her first term she was very pragmatic, not ideological, especially in relation to denationalisation and trades union reform. Indeed before the tinder dry Norman Tebbitt took over in 1981, she had a moderate, Jim Prior, as Employment Secretary who deftly introduced gradual reforms to the unions and industrial disputes. The big changes around marketisation, trades unions and financial deregulation did not really occur till after the election win of 1983 and even more so after the third win in 1987. Thatcher knew that for big change she needed to entrench herself in power. Not to say she didn’t do anything in the first term of her Premiership such as removing exchange controls in Sir Geoffrey Howe’s 1979 budget and the switch from taxes “pay as you earn” to taxes “pay as you spend”, but overall her first term was more pragmatic than ideological. These amateur bull at the gate ideologues we have here in Australia have blown it. It is clear they either have not studied their idol adequately or have skipped to the end of her premiership and ignored the hard work put in prior to 1983. They will not win the next election and I saw the other day the formerly hail fellow well met jovial chap from Sunrise, is popular no more. He currently has an approval rating of negative 14 which is a fair appraisal. Even when a certain election defeat, the next one ,is taken into account I do not want them in charge of my country any longer. I would like Turnbull as PM and Andrew Robb as Treasurer ASAP. Robb is an accomplished economic mind and has credentials in the field going back to the days when the National Farmers Federation was a force for free market economics in Australia. He is also a much more measured and well briefed character than the sketchy carpetbagger currently in the position.

“……. (can’t see all those obsessing about ‘lies’ dropping point scoring for the sake of more rapid implementation of change) – can you?”

Pfh007,

I don’t agree. How 2d did rant and rave about Gillard and the carbon tax and did he EVER let up on it? Did Abbott or Hockey? Yet he expects special leeway to be given to Abbott and Hockey. They cannot even come to the party and admit that they lied, but prevaricate on what they said or their words meant.

I don’t disagree with that, but that pair can’t be allowed to walk away without being called out on their lies. We know they lied, they can’t be allowed to save face and pretend this is all just a misunderstanding, this isn’t Asia! This also isn’t about a few changes here and there, this is a monumentally different gov to what they promised.

Unless we do the smart thing and fix the system (and in doing so act to make it fairer and more equitable) the same problems will plague our economy and they will be exacerbated by a world economy that no longer favours us (pre-GFC mining boom etc).

Insanity is doing the same thing over and over again and expecting different results.

Bringing a sick patient back to health is not just about feeding the patient good food etc; one also has to treat what is ailing them to begin with.

We can all see some fiscal consolidation is required. But the budget provided was so clearly ideologically driven that a blind man could see through it. There was a great chance for these guys to actually take on the mantle of responsibility and earn respect. Instead they opted to pursue narrow partisan interests.

They’ve blown it monumentally. Its hard to overstate how poorly theyve judged this.

The budget is about choices. People are not so much angry with the fact that things change but that the burden is not shared equitably. How’s that property portfolio Joe? How’s that free education Tony? Oh, and what’s in the ‘budget’?

Personally I have one eye on the exit door as, although I have a decent salary and career opportunities, governments here are doing too many stupid things (nothing new but dumb is becoming dumber). Eventually those stupid things will add up and I’ll tell them to GAGF. Unfortunately the less well off won’t have that mobility.

The only votes that matter are with your feet and your capital – not a piece of paper every 3-4 years.

“The whinging has been overdone, cooked to a crisp, burned beyond any semblance of coherency.”

I accept the need for long term structural reform, and it’s a shame that the political climate is so toxic, but honestly the hypocrisy of the Coalition and some of its supporters boggles the mind. The constant whinging, opportunism, hysteria and hyperbole from the Coalition while in Opposition was unrelenting. If they can’t handle a few months of their own medicine, then it’s going to be a long two years in office for the poor dears..

Just have to get rich enough so you can drive on the $6 toll road crumbs and cruise whilst the plebs take the high traffic route. They’re actually very nice late at night and when you want to get home earlier.

The Coalition misused the word “emergency” for political purposes, and are now paying the political price.

There is a difference between the need to do something now to prevent an emergency in the future, and the need to do something now to prevent a present serious danger.

The point is that if there were an emergency, then all measures would need to be taken to address it. Including most of those canvassed on this site.

The fact that the Coalition has exempted many of those that could and should contribute means that they cannot seriously believe that an emergency exists. If they did believe that, they would have done more.

If the Coalition does not act as if there were an emergency, why should the rest of us?

The real damage the Coalition has done is to ensure that the word “emergency” has been devalued, and that if a real emergency exists, we will not believe it.

That we need to act now, and act decisively, is not in question. Using false descriptions, and asking only some people to do the remedial work is not what we need.

Quite right. But Abbott and Hockey got away with this rhetoric because Wayne Swan foolishly said that the budget had to be out back into surplus right away and even more foolishly budgeted for it when it was never going to happen. Swan should have just said that the budget will go back into surplus over a reasonable period of time, but he lacked the political authority.

There is no emergency, there is merely a need budget for the future – which is what a budget is.

However the most dishonest part about this entire blog is the continual deflection from the simple fact that the budget would be fine if we taxed correctly, fairly and consistently.

It is frequently mentioned, sure, but not consistently – every time the EMERGENCY red herring is thrown out there, and confirmed by MB – which is false – the contravening truth must be put next to it regarding taxation.

Yes, all that. But I thought we were long past this discussion now. Hadn’t we moved on to ‘There’s more than one way to skin a cat and the Coalition has chosen the wrong cat.’? The social engineering taking place in this budget was problematic, not the fact that Joe was trying to balance the books.

There is no budget crisis. It’s BS. Now it seems it’s Macro BS as well.

There is a long term period of adjustment which we may have to have over the next 20 years if you believe that government debt ought be below say 50% of GDP.

However, there is no evidence that with a fiat currency in which the federal government taxes and spends and accepts the savings of the private and external sectors that there is any reason to believe that such a limit is necessary when there is no inflation, a relatively high currency and growing inequality.

Any number of countries have far higher public debt than Australia and have suffered no actual budget crisis, other than where there is no fiat currency available or their is rampant inflation or the government borrowings are in a foreign currency.

The Bank of England paper shows that we do not need the investments of foreigners as banks in a county like ours create money every time they make a loan.

Similarly the US has shown that governments can run interest free government debt created by deficits by the Federal Reserve/RBA buying the overnment debt and holding it and returning the interst to the Treasury.

Sure, talk about the issues confronting the country and what some of the solutions might be, but don’t conflate emerging issues with a budget crisis.

Abbott is a proven liar on a grand scale.

He lied to get elected, he lied about the crisis, he lied about the burden sharing, he lied about the poll response to Howard’s first budget. You just can’t trust anything he says without verification from other than a right wing think tank.

He accepts substantial indirect benefits from people who benefit from budget decisions without disclosing them when those benefits are advertsied as not being available (assuming he would have contributed substantially to his daughter’s education at Whitehouse as I did).

He expects the less well off and the unemployed to bear the greatest proportional burden per family of his lies.

He expects the middle quintile to bear the highest dollar burden per family of his lies.

There really is something peculiar in this article. The heading blares, ‘Budget crisis is real’: then we read that ‘Davidson can rightly claim that there is no current emergency’. And Phil Bowen apparently says the crisis is ‘real’, then adds ‘Neither am I saying that we have an immediate emergency…’
A ‘crisis’ is an ‘immediate emergency’. Either we have one or we don’t: and obviously, according to the above eminent though confusing writers [LvO and PB] we don’t.
So why promote the hysterical ‘crisis’ rhetoric? It worked for Abbott and Hockey in getting rid of the Labor government, but it doesn’t seem to have produced any clear sighted thinking on the part of either of them as to long term problems.